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Types of Debt
Types of Debt. Nearly every consumer in the United States owes money to someone else on some form of extended credit. This credit allows consumers to finance homes and vehicles, start businesses, and access goods and services without paying for the full cost up-front. There are basically two types of consumer debt, secured and unsecured.
Secured debt is debt that is tied to some form of property or security. The most common form of secured debt is debt secured by a home or auto. If the debt is not paid, the creditor has the right to obtain the collateral or security on the loan. Secured debt provides for a lien to be placed on a specific item of property. This type of debt allows a consumer to obtain and use high cost items while making timely payments over a course of years. Once the payments are completed, the creditor will release the lien and the consumer will own the property outright.
Unsecured debt is debt that is not tied to any property. The most common forms of unsecured debts are credit card debts, medical debts, personal loans, and debts for services already rendered. If the consumer fails to pay for the goods or services, there is nothing tangible for the creditor to recover. Unsecured debt is ideal for a consumer who is looking for flexibility in terms of amounts and rates with respect to paying back extensions of credit.
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